Citi stake sale shines spotlight on wealth funds

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Citigroup's sale of a stake in the company to Abu Dhabi's investment arm highlights the blessing and curse of government-controlled wealth funds.

With more than $2 trillion in assets, the funds have the deep pockets to serve as a stabilizing force in wobbly financial markets. But their secretive nature has generated tough questions about how to safeguard U.S. national security without discouraging much-needed investment.

"These (wealth funds) are arms of the government. They're not independent investors," said Dale Oesterle, a law professor at Ohio State University's Moritz College of Law.

"Right now they want money, like all good investors do, which is great. What's worrisome is that at some point these investors could turn into a foreign policy arm of their government," he said.

The U.S. Treasury Department and Congress are discussing ways to ensure that these funds base their decisions on financial -- not political -- motivations, and that their purchases of U.S. assets don't compromise national security.

The concern is that some of the largest wealth funds are controlled by countries with strained U.S. relationships, and could seek to acquire companies with sensitive technology or try to destabilize markets by dumping shares.

Wealth funds, concentrated in oil-exporting nations, are designed to invest surplus reserves and generate bigger returns than what would normally be earned by holding cash or bonds.